Creative Negotiations for Buying and Selling
Corey Schwartz, Founding Partner, Serinova Financial, LLC
I had sold my company, Programmer’s Warehouse, to two venture capital firms in 1995 and was enjoying my retirement when an investment banker asked me to look at a “turnaround” situation with a mail-order vitamin company that was losing money. He needed to know whether the company could be saved. I was adamant that I was not going to resurface from retirement to take this on and refused his offer. He continued to press: it would only take three months. Then, could I give him just three weeks? I continued to refuse but eventually told him I’d give him three hours.
I proceeded to speak with the president of the company in an effort to identify what had gone wrong and determine whether there was a way to make the firm profitable. I looked at the financials and quickly recognized that the company, in its current state, was worth very little. The company’s president agreed with my assessment. Fortunately, I also recognized immediately what the problem was and how to fix it (see explanation below). The owner thought that once fixed he would be satisfied selling the company for $8 million. At the same time, I knew a buyer who, if the company were turned around, would pay $17 million.
So, I proceeded to negotiate a transaction to satisfy everyone’s needs. The negotiations basically went like this: I would institute the changes to make the company profitable and then sell the firm. From the proceeds of the sale, the owner would get the first $8 million. I would get 80 percent of everything above $8 million. There would be no cash exchanged prior to the sale of the company. All I had to do was go in, fix the problem, and then sell the company once it was turned around. So much for retirement.
I already knew I had a buyer, and I knew their acquisition criteria. Part of being a successful financier and negotiator is knowing, before entering any transaction, exactly where you want to go. So, we sat down with the lawyers and drafted definitive agreements among the partners. I negotiated the transaction as an employment agreement to avoid causing a taxable event for the owner until the company was sold to a third party.
In looking at where the company was spending money, I found they were spending too much in direct mail – it was almost double what it should have been. With one call to my favorite printer, we divided the print bill in half and, in doing so, added $1 million a year to the bottom line while improving the quality of the printed material. It was that simple. We were engaged for only ninety days and turned it around in less than one month. The company was losing $70,000 per month. With the changes in printing, we added $83,000 per month directly to the bottom line. Other changes made the company’s marketing more effective and further reducing costs.
While the solutions seem simple, the ability to negotiate successfully meant everything. And those successful negotiations were based on strong knowledge of the markets and values, and knowing before I agreed to do anything what the desired outcome would be and what I wanted to achieve. If I went in not knowing what to look for or how to turn things around, I couldn’t guarantee success. The same is true for my understanding of value versus the owner’s understanding of value and the ability to play that arbitrage, to find both massive inefficiencies and tremendous opportunities.
Most business owners don’t know what their companies are worth. Businesses are difficult assets to value. I had to play against this company’s future value. It was a very creative way to look at structuring the purchase. I had no financial exposure. If I couldn’t negotiate the sale of the company for what I thought I could, I didn’t get compensated.
Another important part of the negotiation was understanding all of the pieces and controlling others’ access to that information and how it was presented. There had been litigation involving the company. I knew about the litigation but hadn’t fully understood its implications. One of the potential buyers walked from the transaction because this information was not well presented. If I had presented it better, I could have put it in more acceptable light.
In general what makes transactions go is the complete knowledge of everything that might influence the buyer’s perception of what you’re asking them to do. Most often it’s making a compelling presentation of what are otherwise dull, boring facts. Essentially, it’s selling someone on the upside of the purchase. It’s having large amounts of supporting data. It’s being organized and understanding all of the moving pieces and how they work together. It’s listening to and addressing the fears and objections of the person with which you’re negotiating.
Right now, I’m participating in the negotiation of a $1.2 billion transaction on a master planned community. One of the first things potential partners say is, “Where in Arizona?” The extent to which I’m able to explain the demographics, amenities, and make a case for why a barren spot in the desert is the next Mecca is the key to my success. I paint a mental picture for the partner that is both compelling and factually based so that they become comfortable with success of the project as a foregone conclusion.
© 2006 Ewing Marion Kauffman Foundation. All rights reserved.